The new German Empire was a federal union of Prussia and twenty-four smaller states. The separate states conducted much of the everyday business of government. Unifying the whole was a strong national government with a chancellor — Bismarck until 1890 — and a popularly elected parliament called the Reichstag. Although Bismarck repeatedly ignored the wishes of the parliamentary majority, he nonetheless preferred to win the support of the Reichstag to lend legitimacy to his policy goals.

Bismarck tried to stop the growth of socialism in Germany because he despised its commitment to economic and social equality and its allegiance to a Marxist movement transcending the nation-state. In 1878 he pushed through a law outlawing the German Social Democratic Party, but he was unable to force socialism out of existence. Bismarck then urged the Reichstag to enact new social welfare measures to gain the allegiance of the working classes. In 1883 the Reichstag created national health insurance, followed in 1884 by accident insurance and in 1889 by old-age pensions and retirement benefits. Together, these laws created a national social security system that was the first of its kind anywhere, funded by contributions from wage earners, employers, and the state.

Under Kaiser William I (r. 1861–1888), Bismarck had managed the domestic and foreign policies of the state. In 1890 the new emperor, William II (r. 1888–1918), eager to rule in his own right and to earn the workers’ support, forced Bismarck to resign. Following Bismarck’s departure, the Reichstag passed new laws to aid workers and to legalize socialist political activity. German foreign policy changed most profoundly as well, and mostly for the worse.

Although William II was no more successful than Bismarck in getting workers to renounce socialism, in the years before World War I the Social Democratic Party broadened its base and adopted a more patriotic tone. German socialists identified increasingly with the German state and concentrated on gradual social and political reform.